Something for everyone: the new Lloyds retail bond

When I wrote up my rationale for investing in Lloyds shares, I mentioned how profitable vanilla banking products are today for the retail banks.

A good example is the new Lloyds 5.375% retail bond, which runs for five years until 2015, and which has seen huge demand.

The closing date for applications was today; it should be trading electronically via your broker by the start of next week. (Update: Now listed at my broker as LBG1).

The Lloyds 5.375% bond in detail

Income – At par the new bond pays 5.375%, divided across two payments twice a year.

Maturity – The bond matures in September 2015, and is non-callable. You can hold the bond in an ISA for tax-free income, provided you buy it in the next three months while it still has five years to run.

Value versus gilts – Five year gilts are paying around 2.4%, so you’re getting 3% above the risk-free rate here for holding what’s not a very risky product. I’d say that’s relatively good value.

Value versus cash – Like with all corporate bonds, buying this Lloyds security does NOT grant you any protection under the FSA’s £50,000 compensation scheme. So-called savings bonds are protected, with the Nationwide currently paying 4.25% on its five-year saving bond. Arguably that’s much more attractive, giving bond prices fluctuate unlike savings and your money is safe in cash.

Should you buy this Lloyds bond? It depends on your circumstances. As with the similar RBS Royal Bond last year, I’d suggest cash savings are more attractive for most private investors. (Make sure you get an savings account with a break clause if you might need your money before 2015).

Where the Lloyds bond could come in handy is if you’ve got a stocks and shares ISA and you want to diversify away from equities.

Then again, you’d have to do it in the next couple of months – and I’d personally prefer to buy cheap UK shares!

This bond is another example of how Lloyds is sorting out its funding requirements. Indeed, it just issued a well-covered €500 million eight-year corporate bond. Lloyds is a strong bank with a big future, provided there’s no meltdown.

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been a while since I was at school, but it seems nutty for Lloyds to sell this as a 5.375 bond when 2*5.375 is over 10% in my book…

What do you feel about the possibility of another bank crisis over then next 5 years given the club Med mess a lot of banks seem to have exposure to, and the way in Europe we’re pushing the stick forward for an austerity dive? 10% is a great return, something gives me the feeling of it being associated with great risk but I can’t spot it clearly.
.-= ermine on: Blackbird in Hyde Park and a great view of the Serpentine =-.

@Ermine – Apologies, my phrasing wasn’t clear, or rather I assumed readers knew corporate bond coupons were split between multiple payments (usually two) over the year. The rate is 5.375%, annually, at part.

I’m not very worried about another banking crisis. Anything is possible, but the banking crisis was a a liquidity issue caused by banks having all sorts of dangerous rubbish on their books (Special Interest Vehicles, unsellable mortgage instruments, and so on). The system froze up.

Banks holding government bonds from Portugal or Spain that are considered ‘in trouble’ at yields of less than 5% are a totally different kettle of fish, in my opinion.

What I think is basically happening is long-term rates are rising in a slightly disorderly fashion, but it’s completely rational and to be expected given the economic outlook and the governments’ positions.